Many central banks follow this benchmark in building their reserves, which countries hold to help protect their economies in times of trouble. By adding the renminbi to this group, the I.M.F. effectively considers a currency to be safe and reliable.
It is a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” Christine Lagarde, the managing director of the I.M.F., said in a statement. “The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
It is also a point of pride for Beijing, which made the I.M.F. designation one of its highest economic policy priorities. The renminbi’s new status “will improve the international monetary system and safeguard global financial stability,” President Xi Jinping of China said in mid-November.
The I.M.F. decision also says a lot about the waning influence of Europe. In assessing the group of currencies, the fund put a greater emphasis on the different currencies’ roles in international finance. Although the dollar still dominates in trade, the renminbi is gaining ground on the euro.
Besides the symbolic weight it carries, the I.M.F. label brings specific benefits. China, for example, will gain more influence in international bailouts denominated in the fund’s accounting unit, like Greece’s debt deal.
While the renminbi may gain favor internationally, the I.M.F. designation doesn’t mean that China’s economic overhaul is complete. China still maintains a heavy hand over the country’s financial system. The country also falls short in legal protections, with the Communist Party continuing to play a strong role in deciding court cases.
Such issues could limit the overall appeal of the renminbi.
“It is a historic moment in international finance for an emerging market economy, with a per-capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world’s major reserve currencies,” said Eswar Prasad, a former head of the I.M.F.’s China division who is now the Tolani Senior Professor of Trade Policy at Cornell University. But “the most likely scenario is that the renminbi will erode but not seriously rival the dollar’s status as the dominant global reserve currency.”
The changing currency dynamics also create new geopolitical concerns.
As the renminbi becomes more deeply woven into the global economy, it undermines the ability of the West to impose financial sanctions on countries accused of human rights abuses and other violations, as in the case of Sudan and North Korea. Such countries can increasingly do transactions in renminbi.
China contends that it is crucial to respect nations’ sovereignty and that leaders should be allowed to set policy without fearing international criticism or intervention. China remains a close business and financial partner of Sudan and North Korea, even inviting the president of Sudan to a recent military parade in Beijing.
“As the renminbi rises, countries will have more choices about where they do their banking — and how to potentially circumvent sanctions,” said Christopher Brummer, a Georgetown University law professor specializing in currencies.
In the months before the I.M.F. decision, China took action to make sure that the renminbi was more widely embraced. China did so partly to meet the I.M.F.’s rule that a currency must be “freely usable” before it can be included in this benchmark.
China and Britain have sold renminbi-denominated sovereign bonds for the first time in London, which has emerged as Europe’s hub for the currency. Even Hungary has announced plans to issue its own renminbi-denominated bonds as well, while the Ceinex exchange in Frankfurt has begun trading funds in November based on renminbi bonds. Preparations began to trade renminbi-denominated oil contracts in Shanghai, where copper and aluminum contracts are already sold.
Most important, China began changing the way it sets the value of the renminbi each morning, allowing market forces to play a bigger role. To do so, it abruptly devalued the currency.
The entry itself into the special drawing right, or S.D.R., is mainly symbolic. But such broader moves like greater financial transparency and easier trading — part of the process to meet the I.M.F. requirements — will affect the renminbi’s use.
“There’s this obsession with the S.D.R., and it’s completely out of proportion to its economic impact, which is likely to be trivial,” said Randall Kroszner, a former Federal Reserve Board governor who is now an economics professor at the University of Chicago. “It may be that in the drive to get into the S.D.R., they may make changes that make the renminbi more attractive for international market participants.”
http://www.nytimes.com/2015/12/01/business/international/china-renminbi-reserve-currency.html
But joining this group also introduces new uncertainty into China’s economy and financial system, at a time when the country’s growth is already slowing. To meet the I.M.F. requirement, China was forced to give up some of its tight control over the currency, which could inject fresh volatility into the economy.
“The changing currency dynamics also create new geopolitical concerns.”
Concerns?
That’s an understatement. Coupled with this, just out… “Chinese yuan to become global reserve currency”, it would appear the dollar isn’t slated to be around much longer.